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Monday, December 28, 2009

The Premium On Shareholder Friendly

In theory, there is no value created or destroyed as a firm issues a dividend. This is because the shareholder owns a portion of the company's cash; if he were to receive that cash, it's as if money is being moved from his right hand to his left, i.e. there is no net change (ignoring taxes). In practice, however, companies that pay out funds to shareholders enjoy higher valuations.

But on one day last week, the stock price soared 15+% as the company announced a special dividend that will see it pay out about 1/5 of its cash on hand (almost $1 per depository share). This clearly illustrates the premium shareholders place on companies that pay out. But it also illustrates the importance of control.

Together, management/directors/founders own about 40% of the company, not quite enough for control of the company. This is important because of the large number of options the company has doled out. In the past, management has also downwardly revised exercise prices for their options after the fact, so they have not been shy about transferring wealth from minority shareholders to themselves.